I have just returned home after three weeks of travel. And while it was exciting and eye-opening, it has also been grueling and exhausting. The last leg of my trip took me to Chennai in India.
I have often written to you about how India is booming and galloping along. And while that is true, I have noticed a distinct flaw in the armor now. India is slowing down at a rapid pace. We see that in the industrial production (IP) numbers, we see that in the slowing capital investments and we see that in the overall GDP numbers.
What is rescuing India today is the very healthy monsoon season that has just concluded in September. As I have mentioned a fair bit (about 33 percent) of India’s GDP is dependent on monsoons. And we have had a few years of excellent monsoons here. That is holding up the Indian GDP above the 7.5 percent or higher.
The industrial side of the equation has been hit hard by the relentless pressure of interest rate hikes by the Reserve Bank of India (RBI).
Property markets have hit a plateau, if not in slight decline. Even the CD rates have peaked and each incremental raise in rates does not translate into higher savings.
New home loans are running at 12 percent and car loans can range 15 percent or higher. It is no surprise that new car sales are struggling and home prices are in decline. And despite the pleas of the business community, the RBI stands steadfast in its attempts to crush inflation.
The twin deficits (trade and fiscal) are beginning to get worrisome and I can see the perfect storm developing for India. Despite the Indian rupee not being fully convertible, India is particularly sensitive to the global cues. The world seems to be descending into the second recession (if you can call the recovery a real recovery). And the risk aversion that has gripped the markets has hit India hard.
The Indian rupee has dropped by nearly 15 percent in two months. The stock market has also seen enormous amounts of outflows by the Foreign Institutional Investors (FII). Dalal Street has narrowly escaped bear market territory, having declined by 19.5 percent during the past three months.
And I do not believe we have seen the worst of it yet. If Europe continues to dilly dally, we will see the euro take another dive. And it will take the Indian rupee and Dalal Street with it.
What frustrates me is that India trades with Europe as others do, but is not directly affected significantly by the European slowdown. It is the market sentiment that is driving the market in frenzied moves.
While in the longer run, India will offer its investments at highly discounted rates, at this time, I would be sitting on the sidelines in cash.
This is actually a good time to send U.S. dollars into India awaiting the next leg up. Cash accounts can earn up to 6.5 percent while waiting for the right moment to enter the markets.
I am taking advantage of this pause and sitting on the sidelines with the surplus cash. I have not completely exited the markets and have some long term value investments on the books. But cash allocation is significant portion of my portfolio today.
I do not believe India is down for good. It is pause waiting for the world to calm down a bit. A cooling down period if you want to call it that.
Today’s news of Slovakia holding Europe and Euro to ransom does not help any cause. But of France and Germany can get their act together before the end of October, we may have an incredible Christmas in India.
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